PORTER'S FIVE FORCES MODEL

PORTER'S FIVE FORCES MODEL

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Industry analysis model

Introduction

Porter's fives forces model is an excellent model to analyse a particular industry. It looks at the five main factors that affect a particular industry:

1) Competitive rivalry
2) Power of suppliers
3) Power of buyers
4) Threats of substitutes
5) Threat of new entrants.

As the above factors influence industry performance, it is useful to find out about these factors before you enter an industry or if you are wondering why your business industry is not doing well.

Competitive Rivalry

Competitive rivalry is a good starting point to when analysing a particular industry. If entry to an industry is easy then competitive rivalry is likely to be high. If it is easy for customers to move to substitute products for example from coke to water then again rivalry will be high. Generally competitive rivalry will be high if:

• There is little differentiation between the products sold by competitors.
• Competitors are approximately the same size of each other.
• If competitors have similar strategies.
• It is costly to leave the industry (exit barriers)

Power of Suppliers

Suppliers are also essential for the success of an organisation as they provide businesses with the resources they need to produce their products and services. Supplier power can come from:

• If there is one or just a few suppliers that can provide the resources a business needs.
• If it is expensive to move from one supplier to another (known also as switching cost)
• If there is no other substitute for the product provided by the supplier.

Power of Buyers

Buyers or customers can exert influence and control over an industry in certain circumstances. This happens when:

• There is little differentiation over the product and substitutes can be found easily by customers/buyers.
• Buyers/customers are sensitive to price fluctuations.
• Switching to another product is not costly for customers/buyers.

Threat of Substitutes

Are there alternative products that customers can purchase instead of yours? alternative products that offer the same benefit as your products? The threat from substitute (competitor) products is high when:

• The price of the substitute (competitor) product falls.
• It is easy for consumers to switch from one substitute product to another.
• Buyers are willing to substitute products from different competitors.

Threat of New Entrant

The threat of new organisations entering the industry is high when it is easy for an organisation to enter the industry i.e. entry barriers are low.When a new business is deciding whether to enter an industry it will look at:

• How loyal customers are to existing products,
• How quickly it can achieve economy of scales
• Would it have access to suppliers and
• Would government legislation prevent them or encourage them to enter the industry.

Summary

Porter's five forces model is an essential analysis tool if you want to understand an industry. All five of Porter's forces affect the strength of an industry and the prices that an industry can charge.